How To Get a Home Equity Loan With Bad Credit

Show lenders your motivation through measures besides a credit score

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Home equity can be a significant financial asset to tap into when life's challenges creep up on you unexpectedly. A great way to capitalize on this is with a home equity loan, secured by the value of your home. It acts as a source of cash for covering emergency expenses, renovations, medical bills, and more.

The main qualification for a home equity loan is having equity (ownership) in your home. But almost as important is having a good credit score. A poor score below a lender's average may not necessarily disqualify you from taking out this type of loan, but it could make it more difficult to land one. You'll want to be prepared to obtain a home equity loan with bad credit by keeping some considerations in mind.

Key Takeaways

  • A home equity loan is a secured loan borrowed against the value of your home.
  • Lenders offering home equity loans usually look for borrowers with credit scores above 700.
  • Some lenders will accept loan applications with credit scores in the 600s, but these applicants face much steeper interest rates.
  • Prepare to show your financial worthiness in ways such as a low debt-to-income (DTI) ratio and having greater than 20% home equity.

Credit Requirements for Home Equity Loans

The first step in home equity loan eligibility is straightforward: You need to have at least 20% equity. Home equity is defined as the difference between what you owe on your mortgage and how much you'd get if you sold the house.

Your credit score plays a significant role in whether lenders will approve you for a loan because a weaker score could signal a risky transaction. A lender will typically want to see a score of around 700, but it's possible to find lenders who would work with potential borrowers in the 660 to 700 range.


Twenty percent home equity may seem hard to achieve, but the good news is that you probably have more equity in your home than you realize. The down payment you made when purchasing your home starts to build equity, along with any mortgage payments you’ve made since then.

Lenders weigh other financial factors more significantly when your score is below 700. Having more equity, a lower debt-to-income (DTI) ratio, and a smaller credit utilization ratio could all tip the scales in your favor.

How Credit Scores Impact Interest Rates

A home equity loan is a fixed-rate loan secured by the value of your home. The fixed rate offered can significantly change, depending on your credit score and other factors reviewed by the lender. These include your full credit history, home equity, and lender requirements.

Your unique combination of factors could mean paying thousands of dollars more per year in interest if you have a lower credit score. These are typical interest rates correlated with scores assigned by credit scoring company FICO. Note how much rates increase based on a low score.

FICO Score Typical Interest Rates
740 - 850 5.17%
720 - 739 5.55%
700 - 719 6.8%
670 - 699 8.17%
640 - 669 9.67%
620 - 639 11.17%
Courtesy of the Fair Isaac Corporation (FICO)

How To Get a Home Equity Loan With Bad Credit

You may still qualify for a home equity loan even with poor credit, but it becomes more difficult if your score falls below 700. Consider taking a few of the following steps to get into a better financial position if you decide you need to cash in on your home equity. Lenders are likely to reward you with a better interest rate.

Check Your Credit

The Fair Credit Reporting Act gives you the right to receive a free copy of your credit report once every 12 months. Lenders use reports to review where your credit stands when you apply for funding. You’ll want to know the details in the report, check for errors, and be prepared to answer any questions that lenders may have about it. You can order your free, yearly report at

You also should stay updated on your credit score by using resources offered by your bank, free credit scoring websites, or even apps such as Mint or Credit Karma.

Assess Your Equity

The loan-to-value (LTV) ratio is how lenders assess your equity based on how much you owe on your mortgage. On average, your LTV should be 80% or less. This means that you have at least 20% equity in your home. But those with lower credit scores may want to showcase higher equity.


Figure out your LTV by using this simple calculation: Current loan balance / current appraised value = LTV.

Look at Your Debt-to-Income Ratio

Your DTI ratio represents the total debt payments you make per month as a percentage of your monthly income. Most lenders look for 43% DTI or less for granting a home equity loan, but you should be below that level if you have a poor credit score. It gives lenders more confidence that you'll prioritize your loan payments.

Write a Letter Explaining Your Credit Score

Lenders want to know that you're trustworthy, and having more equity in your home boosts that confidence. But being prepared to address lenders’ concerns about a low credit score is another solid way to show that motivation. Be proactive in providing a letter to explain your credit history, current score, and actions you’re taking to build your credit.

Apply With Multiple Lenders

Shopping around for a loan with multiple lenders is a smart move, regardless of your credit score. Each lender will have different terms and conditions, such as annual percentage rate (APR), possible prepayment penalties, and credit insurance needs. Apply with several lenders you trust and have them compete for your business to get more favorable terms.


Be aware of dishonest lenders. Some may create specific terms under which they know you'll default. Watch out for lenders who want you to sign blank documents, change set terms, or push you to sign without time for a full review.

Alternatives to Home Equity Loans for Borrowers With Bad Credit

You may find that taking out a home equity loan isn’t the best idea with a poor credit score. There are other options to consider based on your financial outlook:

  • HELOC: A home equity line of credit (HELOC) acts like a credit card secured by your home. You can obtain as much money as you need within the draw period. Rates are variable, but you only pay for what you borrow.
  • Personal loans: Personal loans are unsecured and can be used for almost any purpose. These tend to come with less favorable terms, such as higher APRs based on credit scores. You should still shop around to contend with your weaker score.
  • Cash-out refinance: This pays off your first mortgage with a new, larger mortgage with different terms and timelines. The amount of your home equity decreases, but you may find it easier to find a lender that would accept a lower credit score in this scenario.
  • Reverse mortgage: A reverse mortgage converts older owners’ home equity into payments from lenders that are, essentially, buying out your ownership.

The Bottom Line

A home equity loan is a good option for a financial boost to cover emergency expenses, starting a business, or doing a home renovation. Having poor credit doesn’t necessarily deny you this opportunity but prepare to pay a higher rate, hold more equity in your home, and work harder to convince lenders that you’re a good risk.

You may want to pause the endeavor if you aren’t happy with the loan options you obtain with your credit score. Take the time to focus on improving your score instead, and pay special attention to your credit utilization, DTI, and the number of open accounts you have. Paying off debt, contacting creditors for support, and avoiding new purchases will all make you more attractive for a home equity loan.

Frequently Asked Questions (FAQs)

Can I get a home equity loan with a 500 credit score?

It’s not impossible to get a home equity loan with bad credit, but it's more difficult to get approved and find favorable terms when you have a score below 700. It may save you thousands of dollars to focus on improving your score before taking out such a loan.

What are other home equity loan requirements?

A credit score that meets the lender’s minimum, a maximum LTV of 80%, and a DTI below 43% are standard requirements for a home equity loan. Each lending institution has unique screening standards, and these numbers may look different for someone with a lower credit score.

When can you take out a home equity loan?

You can take out a home equity loan once you review and meet the basic requirements. The more equity you have in your house and the higher your credit score, the better your odds of finding favorable terms.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Consumer Financial Protection Bureau. "Borrower Risk Profiles."

  2. Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.”

  3. Consumer Financial Protection Bureau. "What Kind of Down Payment Do I Need? How Does the Amount of Down Payment I Make Affect the Terms of My Mortgage Loan?"

  4. The Financial Industry Regulatory Authority, Inc. "How Your Credit Score Impacts Your Financial Future."

  5. Fair Isaac Corporation. “Get the Score Lenders Use To Evaluate Your Home Mortgage Loan.”

  6. Federal Trade Commission. “Fair Credit Reporting Act,” Pages 27-28.

  7. Consumer Financial Protection Bureau. "What is a Loan-to-value Ratio and How Does It Relate to My Costs?"

  8. Consumer Financial Protection Bureau. "What is a Debt-to-Income Ratio?"

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